e-IFRSline May 06 - IAS 39: Financial Instruments - Grant Thornton

More documents

Recommendations

Info

Available-for-sale financial assetsThis category includes those financial assets not included in any of the previous three categories. Inaddition, an entity may designate any asset other than a trading one as being available for sale. Themost common type of financial asset to be included in this category is likely to be an equityinstrument held as a non-trading investment.Available-for-sale financial assets are measured at fair value with the gains or losses beingrecognised in equity rather than through profit or loss, then recycled through the profit and lossaccount later, usually when the asset is sold or impaired. Rarely, where fair value cannot bemeasured reliably, they are measured at cost.5 Categorisation and measurement of financial liabilitiesFinancial liabilities are classified into one of two categories:• at fair value through profit or loss• other financial liabilities.Financial liabilities at fair value through profit or lossThis category includes all financial liabilities held for trading. Liabilities are held for trading wherethey are derivatives (other than designated hedging instruments) short sales (i.e. investments soldbefore they are purchased) or liabilities held with the intention to repurchase in the near term orfinancial liabilities held for the purpose of short-term profit making.Further, the fair value option amendment to IAS 39 applies the same restrictions to financial liabilities,as are noted above in the context of financial assets at fair value through profit or loss.Other financial liabilitiesThese are carried at amortised cost (see above under held-to-maturity financial assets).6 Initial measurementWhether carried at fair value or amortised cost, all financial assets and liabilities are measured oninitial recognition at the fair value of the consideration given or received. This includes transactioncosts, except for assets or liabilities at fair value through profit or loss.For example, if employee loans are issued on an interest-free basis, then the fair value onrecognition is not the amount paid but the amount discounted for the effect of the below-market-valueinterest on the loans. Thus, there may be an immediate charge for the employee compensationelement.7 ImpairmentImpairment tests are required where there is objective evidence that financial assets are impaired.Such tests are required on assets carried at amortised cost and also on assets designated asavailable for sale (because previous gains or losses on those will have been recognised in equityrather than through the profit and loss account). Impairment losses are recognised in profit or loss.Where assets are carried at amortised cost, subsequent reversal is permitted; where assets arecarried at cost (because a reliable fair value was not available) subsequent reversal is not permitted.For available-for-sale financial assets, subsequent reversal is permitted for debt instruments but notfor equity instruments.
8 Embedded derivativesIn some cases, derivatives are embedded into a host contract. Where this is the case, the derivativemay need to be separated from the host contract and accounted for as a derivative (unless the entireinstrument is carried at fair value through profit or loss). If an embedded derivative is required to beseparated out but this is not possible, the entire instrument will need to be treated as held for trading.IAS 39 contains detailed provisions as to when an embedded derivative exists and should beseparated.Embedded derivatives may arise in many types of contract including some that may not be financialinstruments. Examples of embedded derivatives that need to be separated and carried at fair valuethrough profit or loss are:• a lease contract with an early repayment option (at a value not similar to its amortised cost)• an option to extend the remaining term of a debt instrument without adjustment to the currentmarket interest rate at the time of extension.9 Get in touch with IFRSTo assist you to get in touch with IFRS we will be hosting a second series of workshops during Mayand June at the Grant Thornton offices in Sandton.The workshops will be presented by the highly skilled members of our IFRS technical implementationteam and the programme consists of four morning sessions as follows:Venue:Grant Thornton office park137 Daisy Street, Cnr Grayston DriveSandownSandtonDates:Session 1: 31 May 2006 - Introduction of IFRS and the changes from GAAPSession 2: 7 June 2006 - IFRS 3 (Business combinations & implementation)Session 3: 14 June 2006 - IAS 16 (Property, plant and equipment) & IAS24 (Related Parties)Session 4: 21 June 2006 - IAS 32, IAS 39 and IFRS 7 (Financial instruments)Time:08h00 for 08h30Who should attend:Attendance is recommended but not restricted to financial directors or managers and accounting staff.Cost:• R3 000 per delegate (for 4 sessions)• Discount will apply if more than 3 delegates register from the same company.Register:To register your attendance go to www.gt.co.za
Page 1 and 2: Issue 2May 2006By Jeanette Hern, Pa
Page 3: 3 Distinguishing between financial

e-IFRSline May 06 - IAS 39: Financial Instruments - Grant Thornton

Create successful ePaper yourself

Delete template?

Save as template?